Strategy
Switching costs
The cost or effort for a customer to change supplier.
Facts checked against sources onWhat does Switching costs mean?
Switching costs are the money, time, effort or risk a customer faces when moving to a different supplier, such as moving data, retraining staff or breaking a contract. High switching costs keep customers loyal and make it harder for rivals to win them.
Where does it come up in case interview prep?
- Value chains and profit poolsLesson in How industries work: the toolkit
- Business models: who pays, and for whatLesson in How industries work: the toolkit
- Procurement and sourcing: where the money goesLesson in Sourcing, trade and supply risk
- What competitive advantage really isLesson in Why some businesses win: competitive advantage and the economics of strategy
- Network effects: when each user makes it betterLesson in Why some businesses win: competitive advantage and the economics of strategy
- Switching costs, lock-in and habitsLesson in Why some businesses win: competitive advantage and the economics of strategy
- Moats that erode: technology, rules and new rivalsLesson in Why some businesses win: competitive advantage and the economics of strategy
- Using it in a case: is the advantage real?Lesson in Why some businesses win: competitive advantage and the economics of strategy
Related terms
- Barriers to entryWhat makes it hard for new competitors to enter a market.
- Network effectsA product becomes more valuable as more people use it.
- Economies of scaleCost per unit falls as volume rises.
- Economies of scopeCost falls when related products share resources.
- Competitive advantageWhat lets a firm earn more than its rivals over time.
- Vertical integrationOwning more stages of your own supply chain.
- Horizontal integrationCombining with firms at the same stage, often competitors.
- CommoditizationWhen products become interchangeable and compete mainly on price.
Learn it in context
See Switching costs at work in a lesson from How industries work: the toolkit, with checks as you go.
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